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Credit Suisse Raises $2 Billion as CEO Cuts Hedge Fund Unit

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Patrick Winters and Marion Halftermeyer
·5 min read
Credit Suisse Raises $2 Billion as CEO Cuts Hedge Fund Unit
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(Bloomberg) -- Credit Suisse Group AG is raising $2 billion from investors and cutting the hedge fund unit at the center of the Archegos Capital Management losses as Chief Executive Officer Thomas Gottstein seeks to recover from one of the most turbulent periods in the bank’s recent history.

Credit Suisse, which has exited about 97% of its exposure to Archegos, expects a related 600 million-franc ($654 million) loss in the second quarter, taking the total hit from the collapse to about $5.5 billion. In response, it’s cutting about a third of its exposure in the prime business catering to hedge fund clients, while strengthening capital with the sale of notes converting into shares.

Gottstein is battling to rescue his short tenure as chief executive officer after Credit Suisse was hit harder than any other competitor by the collapse of Archegos, the family office of U.S. investor Bill Hwang. The timing of the blowup could hardly have been worse, coming just weeks after Credit Suisse found itself at the center of the Greensill Capital scandal, when it was forced to suspend investment funds. While seeking to placate investors hurt by the losses, he also now faces the fresh challenge of navigating enforcement proceedings announced by Swiss regulator Finma on Thursday.

The double whammy wiped out a year of profit and left Gottstein fighting to demonstrate to incoming Chairman Antonio Horta-Osorio that he’s of the right mettle to carry the bank through the volatility which has left investors nursing losses and questioning its strategy and controls. Having taken on the position more than a year ago, the CEO had stumbled over other hits before Greensill shattered what was supposed to be a new era of calm.

The two scandals have left the CEO standing while many once powerful members of his management board had to leave. Gone are investment banking head Brian Chin and Chief Risk Officer Lara Warner, along with a raft of other senior executives including equities head Paul Galietto and the co-heads of the prime brokerage business. Asset management head Eric Varvel is also being replaced in that role by ex-UBS Group AG veteran Ulrich Koerner.

The bank has also suspended its share buyback and cut the dividend.

Credit Suisse fell as much as 6.9% in Zurich trading and was 6.1% lower as of 11:19 a.m. local time, taking this year’s losses to about 23%.

The bank plans to reduce risk at the investment bank, including cutting about $35 billion of leverage exposure at the prime brokerage unit -- which services its hedge fund clients, Gottstein said in an interview with Bloomberg Television. That’s about a third of its total exposure.

“Although capital has been mainly addressed, we still see questions remaining in terms of strategy and risk management,” JPMorgan Chase & Co. analysts wrote in a note to investors. “Capital has been clearly the main focus.”

The bank said the convertibles notes were sold to core shareholders, institutional investors and high net worth individuals and will help bring the bank’s CET1 ratio -- a key metric for capital -- nearer its target 13%. That number had dropped to 12.2% at the end of the first quarter.

In addition to the enforcement proceedings, Credit Suisse said that the Swiss regulator has told it to hold more capital to guard against losses by taking a more conservative view of its risk. The bank increased its assets weighted according to risk for both Archegos and Greensill. While the capital raise came after Finma raised the bank’s capital requirements, Gottstein said the decision was the bank’s own.

“This was not as a reaction to any request by Finma or any other regulator,” Gottstein said on a call with analysts. “It was our proactive view that, together with the board, we decided to issue these two mandatories and that will really help us also against any possible market weakness over the coming months.”

The Greensill debacle is also far from over. Credit Suisse has so far returned about half the $10 billion in investor money held by the funds at the time of their suspension. While the bank marketed the funds as among the safest investments it offered, investors are left facing the prospect of steep losses as the assets are liquidated. Credit Suisse is leaning toward letting clients take the hit of expected losses in the funds, a person familiar with the discussions said earlier this month.

“We have good visibility for a large portion of the remaining positions,” Gottstein said. “There are three more distinct positions which we will work through in the next months and quarters. We are not planning to do any form of step-in. We are very clearly focused on getting the cash back to our investors.”

The impact for Credit Suisse from both Archegos and Greensill could add up to $8.7 billion, according to JPMorgan analysts Kian Abouhossein and Amit Ranjan.

First Quarter Highlights:

International wealth management pretax profit 523m francs vs 442m estimateCET1 ratio 12.2% vs 12.1% estimateProvisions for credit losses 4.4b francsNet revenue 7.6b francsSwiss Universal Bank pretax profit 665m francs vs 548m estimateAPAC pretax profit 524m francs vs 304m estimate

(Adds Gottstein comment on capital raise in 12th paragraph)

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